Working pensioners miss tax breaks

A BOOM in the number of people working beyond retirement age has led to as many of 520,000 people inadvertently paying thousands of pounds in unnecessary tax on their pensions, new figures have suggested.

Since the millennium there has been a steep rise in over-65s continuing to work while drawing the state pension.

The state pension can be delayed in exchange for a 5.8 per cent uplift for each year it is deferred – but research by mutual Royal London published today found that around 520,000 people have not done so, and are potentially paying extra tax.

This group earns more than the personal allowance – £11,850 in the current tax year – meaning their whole state pension is taxed at the basic-rate 20 per cent or higher-rate (40 per cent). In many cases, according to Royal London, deferring the state pension until full-time retirement would mean it is taxed at 20 per cent or not at all.

Using this tactic, the average man could save around £3,000 and the average woman as much as £4,000, according to the report. Women have more to gain as, in addition to the tax saved, they typically live longer than men and therefore receive more in state pension payments.

Royal London called on the Government to better advertise the option to defer pensions, particularly to those working past state pension age.

Sir Steve Webb, the former pensions minister who is now policy director at Royal London, said people who had worked hard to build up a state pension “do not want to see a big chunk of it disappear in unnecessary taxation”. He said: “If their earnings are enough to support them, it makes sense to consider deferring taking a state pension so that less of their pension disappears in tax.”

The deferral option is little know among pensioners. Even less used is the ability to start and stop payments, though this can only be done once.

Andrew Tully, of Canada Life, a pension company, warned of the risk that people “lose out financially if they die relatively early”.

He added: “Taking the state pension at the normal age, and reinvesting any income which is not needed in an Isa or pension is an alternative option.”

The rules differ if you reached state pension age before or after April 2016, when the new “flat rate” state pension took effect. Prior to 2016, the bonus for deferring was 10.4 per cent a year, roughly double today’s 5.8 per cent.

Under the new rules, the state pension increases 1 per cent every week you defer, subject to a minimum of nine weeks.

For instance, if you qualify for the full new state pension you would be entitled to £164.35 a week, or £8,546 a year. Delaying by a year would boost your payments by £493 a year, assuming no increases to the pension in that time.